Super savers: lessons learnt from COVID-19

On 20 February 2020, the Australian Stock Exchange hit a then record high, with the ASX200 closing at a dizzy 7162.5. But the following day, Italy reported its first death from COVID-19, the World Health Organisation said the disease had reached 26 countries outside China, and markets officially began to flip out.

On 23 March, the index closed at 4546. It had lost almost 37 per cent of its value in a month.

It was a similar story around the world. But almost as remarkable was the rebound that followed. In the US, the Dow had recovered completely by November 2020, and went on to reach astonishing new highs. In Australia, it took a little longer, but by May 2021, the ASX200 had also surpassed its pre-COVID peak.

The fall and rise of markets during COVID-19 showed the value of taking a long-term approach when it comes to super.Credit: Getty

For Australians, whose superannuation funds are typically heavily exposed to domestic and international shares, the COVID crash had been a test of nerve. At Rest, the phones just kept ringing.

“The volume of member interactions with Rest Advice more than doubled in March 2020 compared to February,” says Rest group executive Deb Potts. “Three-quarters of those interactions involved members looking for advice on investment options.”

As markets plummeted, super members all over Australia jumped ship, switching from balanced options to more defensive investments such as cash and bonds.

During that March quarter, Australians – largely older people, nearing retirement – switched about $25 billion of their super investments into cash, the Reserve Bank of Australia says. For many, that wasn’t the best move.

Locking in losses

There’s a problem with selling when the market is falling. By December 2020, Rest members who had remained in the fund’s Core Strategy investment option, had recouped their losses, Potts says.

“However, there were individuals who had switched to cash, but were waiting for the end of the pandemic to switch back to their previous investment options. By mistiming the market, these individuals missed out on the market rebound, and crystalised their losses.”

If a fund member had started the year with $100,000 in Rest’s Core Strategy (was making no additional contributions), switched to cash at the end of March 2020, and waited until the announcement of effective vaccines at the end of November before switching back, they would have ended up about $12,000 worse off than if they’d stayed in the Core Strategy option, Potts says. Bear in mind, past performance is not an indicator of future performance.

Of course, in an ideal world, you would sell shares at the market’s peak and buy them again when it hits rock bottom. The trouble is, without a crystal ball, who knows where the top and bottom are going to be?

“Attempting to pick the precise peak and trough of a market is risky and fiendishly difficult,” Potts says. “Even in hindsight, pinpointing the catalysts that mark the beginning and end of periods of major market volatility, such as the Global Financial Crisis and the COVID-19 pandemic, remains complex.”

Long-term thinking

Every super fund manages its portfolio differently during a crisis. Some are bullish, others more conservative.

Superannuation is a long-term proposition that rides out highs and lows.Credit: iStock

“During the market downturn, Rest remained focused on its long-term investment strategy,” Potts says. “We saw the opportunity to use the cash we had on hand to buy assets at cheaper prices when the market was at its lowest. This paid off in our equities portfolio in particular, by generating strong returns during the market rebound.”

Incredibly, despite the COVID crisis, super funds as a whole ended 2020 in the black, delivering a 3.7 per cent return, according to research company Chant West. That was quite a vindication for investors who had held their nerve.

Investment guru Warren Buffett has described the stockmarket as “a relocation center at which money is moved from the active to the patient”. Potts says it’s important to think of superannuation as a long-term proposition, and ride out the highs and lows,

“While global markets have always been subject to volatility, the one consistent observation is that over the long term, markets have typically trended upwards.”

There may be a case for changing your strategy at different stages of life, but it generally pays to talk to an expert before doing so.

“For most individuals, maintaining a long-term strategy with their investment options is the most advised path,” Potts says. “If you are unsure of the right investment option for you, seek advice from a licensed financial adviser. If you are a Rest member, you can access advice on your investment strategy from one of Rest’s licensed financial advisers at no additional cost*.”

It’s important that your super is invested according to the level of risk you’re comfortable with. Rest members can find help choosing the right investment option for them by visiting Rest.com.au/advice

* Rest Advice is provided by Link Advice Pty Ltd ABN 36 105 811 836, AFSL 258145 (Link Advice). Rest Advisers are staff members of Rest and provide advice as authorised representatives of Link Advice. Rest Digital Advice is provided by Link Advice. Rest Advice may be accessed by members without incurring additional fees for simple advice. An advice fee may be payable for complex advice. You should read the Rest Advice Financial Services Guide, which you can obtain by calling us on 1300 300 778, before accessing these services.

Product issued by Retail Employees Superannuation Pty Limited. Consider if it is appropriate for you and read the PDS and TMD available at rest.com.au/pds before deciding to join or stay.